Trading Treasuries (nominal and TIPS)

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elpollo
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Re: Trading Treasuries (nominal and TIPS)

Post by elpollo »

any suggestion on how to choose between the various 4/8/13/26 week offerings in terms of basis points ?

going to start this as a hobby instead of my Banks Savings account which offers 1.3% for now ;
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MisterMister
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Re: Trading Treasuries (nominal and TIPS)

Post by MisterMister »

elpollo wrote: Sun Jul 31, 2022 10:56 pm any suggestion on how to choose between the various 4/8/13/26 week offerings in terms of basis points ?

going to start this as a hobby instead of my Banks Savings account which offers 1.3% for now ;
If you've settled on one of those very short term nominal choices, and you don't need the money until maturity, the answer is probably the 26-week since it's going to be the highest rate. It's a tad cheaper to buy through the auction though you won't know exactly the rate until after the auction. There's still a little time this morning to order for the 13- or 26-wk auction today. Fidelity reports an expected rate of 2.824 % for the 26-week and 2.335 for the 13-week. Rates have dropped a little in the very recent past so the actual results may be more or less. If you use Fidelity and have your bank account linked you can EFT-transfer money on the Fidelity side and probably have immediate use of the money for purchases. Good luck.
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Doc
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

MisterMister wrote: Mon Aug 01, 2022 7:19 am If you've settled on one of those very short term nominal choices, and you don't need the money until maturity, the answer is probably the 26-week since it's going to be the highest rate.
I agree with most of your points. But I would use two 52 week bills maturing in December and July putting new contributions in the longer term option each time.

The one draw back is that you cannot set up the 52 week to auto roll but that's not a big deal. The 52 auction is on the same date as the corresponding maturing 52 week bill.
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elpollo
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Re: Trading Treasuries (nominal and TIPS)

Post by elpollo »

MisterMister wrote: Mon Aug 01, 2022 7:19 am
elpollo wrote: Sun Jul 31, 2022 10:56 pm any suggestion on how to choose between the various 4/8/13/26 week offerings in terms of basis points ?

going to start this as a hobby instead of my Banks Savings account which offers 1.3% for now ;
If you've settled on one of those very short term nominal choices, and you don't need the money until maturity, the answer is probably the 26-week since it's going to be the highest rate. It's a tad cheaper to buy through the auction though you won't know exactly the rate until after the auction. There's still a little time this morning to order for the 13- or 26-wk auction today. Fidelity reports an expected rate of 2.824 % for the 26-week and 2.335 for the 13-week. Rates have dropped a little in the very recent past so the actual results may be more or less. If you use Fidelity and have your bank account linked you can EFT-transfer money on the Fidelity side and probably have immediate use of the money for purchases. Good luck.
thanks for the reply, this will be using larger my 'emergency fund' /cash assets, I was more curious about how to pick a 'sweet spot' based on basis points , e.g. for longer terms some suggest 20 BPs for each year of duration ... ; -e p
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jeffyscott
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

elpollo wrote: Mon Aug 01, 2022 2:14 pm
MisterMister wrote: Mon Aug 01, 2022 7:19 am
elpollo wrote: Sun Jul 31, 2022 10:56 pm any suggestion on how to choose between the various 4/8/13/26 week offerings in terms of basis points ?

going to start this as a hobby instead of my Banks Savings account which offers 1.3% for now ;
If you've settled on one of those very short term nominal choices, and you don't need the money until maturity, the answer is probably the 26-week since it's going to be the highest rate. It's a tad cheaper to buy through the auction though you won't know exactly the rate until after the auction. There's still a little time this morning to order for the 13- or 26-wk auction today. Fidelity reports an expected rate of 2.824 % for the 26-week and 2.335 for the 13-week. Rates have dropped a little in the very recent past so the actual results may be more or less. If you use Fidelity and have your bank account linked you can EFT-transfer money on the Fidelity side and probably have immediate use of the money for purchases. Good luck.
thanks for the reply, this will be using larger my 'emergency fund' /cash assets, I was more curious about how to pick a 'sweet spot' based on basis points , e.g. for longer terms some suggest 20 BPs for each year of duration ... ; -e p
I don't believe that rule was limited to longer terms, it was for any term, so it would reduce to 5 BP per quarter or about 0.4 per week, I guess, and it appears that would have you buy 6 month maturities. Of course, there could be a little variation around that in the secondary market.

But, if your purpose is a substitute for a savings account, maybe it makes sense to create a rolling ladder? OTOH, if your purpose is to follow a 20 BP per year strategy, then I think that would have you just put it all in ~6 month and reevaluate at maturity.

I no longer worry about that "rule", myself. Following something like that in the past resulted in ending up with too many CDs maturing at about the same time, leading to a need to reinvest it all during a period of very low interest rates.
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Re: Trading Treasuries (nominal and TIPS)

Post by FactualFran »

Doc wrote: Mon Aug 01, 2022 9:30 am The one draw back is that you cannot set up the 52 week to auto roll but that's not a big deal. The 52 auction is on the same date as the corresponding maturing 52 week bill.
Whether 52-week T-Bills can be auto rolled depends on the brokerage. Fidelity allows it.

52-week T-Bill are auctioned on a Tuesday, issued two days later on Thursday, and mature on the Thursday 52 weeks after being issued.
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Re: Trading Treasuries (nominal and TIPS)

Post by billyt »

I have been buying treasuries and TIPS, building out my 7 year off ramp from my bond funds. It has been interesting. Now, real yields are heading negative again, and I am very uncomfortable locking in a real negative yield. I am also concerned about the possibility of deflation, with the Fed's market intervention. What about the possibility of an actual (real and nominal) loss from those secondary market TIPS bought with a significant inflation markup? Trying to choose individual treasuries and TIPS smacks of market timing to me, and I know I cannot predict either interest rates nor inflation. Maybe duration matching with funds is better?
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

billyt wrote: Tue Aug 02, 2022 7:15 am I have been buying treasuries and TIPS, building out my 7 year off ramp from my bond funds. It has been interesting. Now, real yields are heading negative again, and I am very uncomfortable locking in a real negative yield. I am also concerned about the possibility of deflation, with the Fed's market intervention. What about the possibility of an actual (real and nominal) loss from those secondary market TIPS bought with a significant inflation markup? Trying to choose individual treasuries and TIPS smacks of market timing to me, and I know I cannot predict either interest rates nor inflation. Maybe duration matching with funds is better?
If TIPS real yields are negative, then the expected return on nominal bonds of same maturities also are negative. I don't have a problem with negative real yields on shorter term TIPS, but am hesitant to buy longer maturities with relatively low yields (nominal or TIPS).

You do not experience a real loss with deflation from secondary market TIPS with high index ratios, other than possibly the real loss you signed up for if you bought at negative real yields. The prices of things you buy decrease along with the purchasing power of your TIPS.

I agree that there is an element that could be considered market timing in buying shorter-term Treasuries (nominal or TIPS) due to the flattish or inverted yield curve at intermediate and long maturities. I'm OK with that. If you're not, then don't do it.

You can duration match with funds or individual Treasuries (nominal or TIPS). I prefer individual securities, but many here prefer funds.

Kevin
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evelynmanley
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Re: Trading Treasuries (nominal and TIPS)

Post by evelynmanley »

I'd like to pose a question about VMFXX and how soon we can trade once we've set a transfer of funds to VMFXX.

Yesterday I set in motion a transfer (initiated from Vanguard) from my Bank of America checking account (10k) and also a transfer from my Ally savings account (25k). Immediately in my VMFXX account it said the full amount of 35k is available to trade. Ally confirmed the transfer this morning, but Bank of America doesn't even show it as pending yet. So if I wanted to purchase Treasury bills today and the BoA funds haven't actually transferred, what happens? Why would Vanguard say the funds are available for trading when they don't have the funds yet? What am I missing?

I'd also like to ask your opinions about whether I should keep the 35k in the VMFXX fund, now at 1.92%, which we know will keep rising (right?), or purchase Treasury bills. I will be using 20K of this amount to purchase I-Bonds in January 2023, so I'm looking at bills up to 6mo. I see a Treasury bill with maturity date 1/19/23, with 2.895 yield, 98.66 price, zero coupon, settles 8/3/22. Also there are several Treasury bills which mature in one-five months which have yields not too much lower than the 6mo bill. What is the likelihood that the VMFXX interest rate will yield as much as these Treasury bills, therefore it would make sense to just leave the funds in VMFXX?

I have 128k in a 3mo Treasury bill which will mature on 8/30, so I know I'll be coming back to you with pleas for advice. :)

Thank you!
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

evelynmanley wrote: Tue Aug 02, 2022 12:17 pm I'd like to pose a question about VMFXX and how soon we can trade once we've set a transfer of funds to VMFXX.

Yesterday I set in motion a transfer (initiated from Vanguard) from my Bank of America checking account (10k) and also a transfer from my Ally savings account (25k). Immediately in my VMFXX account it said the full amount of 35k is available to trade. Ally confirmed the transfer this morning, but Bank of America doesn't even show it as pending yet. So if I wanted to purchase Treasury bills today and the BoA funds haven't actually transferred, what happens? Why would Vanguard say the funds are available for trading when they don't have the funds yet? What am I missing?
You aren't missing anything. Vanguard and Fidelity both make inbound transfers available for trading (but not withdrawal) as soon as the buy order is entered. I wouldn't worry about what Ally or B of A shows, as there may be different timing for their ACH transfers. As long as the B of A transfer is in the ACH process, I wouldn't worry about it.
evelynmanley wrote: Tue Aug 02, 2022 12:17 pm I'd also like to ask your opinions about whether I should keep the 35k in the VMFXX fund, now at 1.92%, which we know will keep rising (right?), or purchase Treasury bills. I will be using 20K of this amount to purchase I-Bonds in January 2023, so I'm looking at bills up to 6mo. I see a Treasury bill with maturity date 1/19/23, with 2.895 yield, 98.66 price, zero coupon, settles 8/3/22. Also there are several Treasury bills which mature in one-five months which have yields not too much lower than the 6mo bill. What is the likelihood that the VMFXX interest rate will yield as much as these Treasury bills, therefore it would make sense to just leave the funds in VMFXX?
That's the 64M dollar question, isn't it?

One yield curve theory posits that an investor can be indifferent to buying different maturities, since the future yield expectations are included in the yields along the curve. By this theory, your expected return is the same for rolling 1-month bills for six months or buying a 6-month bill. However, generally we expect a yield premium for taking additional term risk (extending maturity), but some models indicate that this yield premium has been negative lately.

I'm just gradually moving from money market to short-term TIPS and nominal Treasuries (or in my case, box spreads, but most people won't want to do that as it involves options) as yields increase. When yields decrease or level out, I slow down, and go shorter term. Yes, this is market timing, and I'm OK with that, but it may not be right for you.

Today I bought a box spread in a Fidelity IRA with Aug 19, 2022 maturity at a net yield of 2.62%, compared to Treasury at 2.03%. This is super short term; I basically am parking cash in the highest short term yield I can get while waiting for higher TIPS yields. And this was only part of what I have in FZDXX (Fido premium MM) in that account. I don't think I'd bother with a Treasury at 2% when FZDXX 7-day SEC yield was 1.90% yesterday.

Kevin
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billyt
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Re: Trading Treasuries (nominal and TIPS)

Post by billyt »

Kevin: You indicate you are waiting for higher TIPS yields. How do you determine it is time for you to buy? Serious question.
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Re: Trading Treasuries (nominal and TIPS)

Post by billyt »

Interest rates, both real and nominal, seem to be pretty volatile. I bought some of the 7/15/23 TIPS today for a real yeild of -.66%. Now I wish I had waited! I try to follow these purchases to see how they are doing and hopefully learn, but the math is confusing, even just figuring the various components of the purchase cost and value.
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Re: Trading Treasuries (nominal and TIPS)

Post by evelynmanley »

Kevin M wrote: Tue Aug 02, 2022 1:43 pm
evelynmanley wrote: Tue Aug 02, 2022 12:17 pm I'd like to pose a question about VMFXX and how soon we can trade once we've set a transfer of funds to VMFXX.

Yesterday I set in motion a transfer (initiated from Vanguard) from my Bank of America checking account (10k) and also a transfer from my Ally savings account (25k). Immediately in my VMFXX account it said the full amount of 35k is available to trade. Ally confirmed the transfer this morning, but Bank of America doesn't even show it as pending yet. So if I wanted to purchase Treasury bills today and the BoA funds haven't actually transferred, what happens? Why would Vanguard say the funds are available for trading when they don't have the funds yet? What am I missing?
You aren't missing anything. Vanguard and Fidelity both make inbound transfers available for trading (but not withdrawal) as soon as the buy order is entered. I wouldn't worry about what Ally or B of A shows, as there may be different timing for their ACH transfers. As long as the B of A transfer is in the ACH process, I wouldn't worry about it.
evelynmanley wrote: Tue Aug 02, 2022 12:17 pm I'd also like to ask your opinions about whether I should keep the 35k in the VMFXX fund, now at 1.92%, which we know will keep rising (right?), or purchase Treasury bills. I will be using 20K of this amount to purchase I-Bonds in January 2023, so I'm looking at bills up to 6mo. I see a Treasury bill with maturity date 1/19/23, with 2.895 yield, 98.66 price, zero coupon, settles 8/3/22. Also there are several Treasury bills which mature in one-five months which have yields not too much lower than the 6mo bill. What is the likelihood that the VMFXX interest rate will yield as much as these Treasury bills, therefore it would make sense to just leave the funds in VMFXX?
That's the 64M dollar question, isn't it?

One yield curve theory posits that an investor can be indifferent to buying different maturities, since the future yield expectations are included in the yields along the curve. By this theory, your expected return is the same for rolling 1-month bills for six months or buying a 6-month bill. However, generally we expect a yield premium for taking additional term risk (extending maturity), but some models indicate that this yield premium has been negative lately.

I'm just gradually moving from money market to short-term TIPS and nominal Treasuries (or in my case, box spreads, but most people won't want to do that as it involves options) as yields increase. When yields decrease or level out, I slow down, and go shorter term. Yes, this is market timing, and I'm OK with that, but it may not be right for you.

Today I bought a box spread in a Fidelity IRA with Aug 19, 2022 maturity at a net yield of 2.62%, compared to Treasury at 2.03%. This is super short term; I basically am parking cash in the highest short term yield I can get while waiting for higher TIPS yields. And this was only part of what I have in FZDXX (Fido premium MM) in that account. I don't think I'd bother with a Treasury at 2% when FZDXX 7-day SEC yield was 1.90% yesterday.

Kevin
Thank you again for your help, Kevin. Am I understanding correctly how to determine yield of VMFXX? At 1.92% interest rate today, do we annualize that to determine monthly amount? (Investment amount x 1.92%)/12?
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

billyt wrote: Tue Aug 02, 2022 2:33 pm Kevin: You indicate you are waiting for higher TIPS yields. How do you determine it is time for you to buy? Serious question.
What I had been doing was buying more if the yield was higher than last time I bought for that maturity. Yields were rising so fast that I was getting significantly higher yield with each purchase. For example, for example, since you mentioned the 7/15/2023, starting on 5/18/2022 I bought 10 each at the following yields:

-2.67%
-2.06%
-1.63%
-0.95%
-0.27%

Yield today for large quantity was -0.55% (-0.63% seasonally adjusted), which is lower than my last purchase, so I have not been buying more for now. If TIPS yields don't continue to increase, I'll probably buy more to increase my average yield for each maturity. This is similar to my purchases of other maturities, which range from 1/15/2023 to 4/15/2027.

I pay attention to seasonally adjusted yields, but I don't think most people have to do that, as long as they trust that the market is efficient, so if you see a weirdly high or low yield for a shorter term, probably lots of that is due to seasonality. For example, the yield for the 4/15/2024 is 0.00%, and the yield for the 7/15/2024 is -0.12%, so it would appear that the 4/15 is a better deal. But that doesn't make a lot of sense with the generally upward sloping yield curve. The seasonally adjusted ask yields are -0.30% for the 4/15 and -0.16% for the 7/15, which makes more sense given the positive slope of the yield curve in this range.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

billyt wrote: Tue Aug 02, 2022 3:01 pm Interest rates, both real and nominal, seem to be pretty volatile. I bought some of the 7/15/23 TIPS today for a real yeild of -.66%. Now I wish I had waited! I try to follow these purchases to see how they are doing and hopefully learn, but the math is confusing, even just figuring the various components of the purchase cost and value.
What is it that your are confused about?
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

evelynmanley wrote: Tue Aug 02, 2022 3:06 pm Thank you again for your help, Kevin. Am I understanding correctly how to determine yield of VMFXX? At 1.92% interest rate today, do we annualize that to determine monthly amount? (Investment amount x 1.92%)/12?
What exactly is it that you want to know?

If you are wondering what the monthly income will be, we don't really know. The distribution yield may be higher or lower than the SEC 7-day yield, and it's the distribution yield that determines the income (actually vice versa).

Also, we expect that the VMFXX yield will continue to increase, at least to the effective federal funds rate, which is about 2.3%, so we probably will earn more than 1.9% over the next month.

EDIT: Most yields and returns are expressed as annualized numbers, which is what the 1.92% is, so the annualized yield is what we use to compare investments.

Kevin
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Firefly80
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Re: Trading Treasuries (nominal and TIPS)

Post by Firefly80 »

Kevin,

Why do you personally prefer Individual Bonds over funds?

Do you think it’s possible to get better Returns buy purchasing Bonds at certain points along the Yield Curve compared to funds?
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Firefly80 wrote: Tue Aug 02, 2022 4:02 pm Kevin,

Why do you personally prefer Individual Bonds to Funds?

Do you think it’s possible to get better returns buy purchasing at certain points along the Yield Curve compared to funds?
I still have significant money in bond funds, but lately have only been buying individual securities.

I don't know that I will get better returns, but am uncomfortable locking in relatively low yields for longer terms. I know this does not go along with the conventional wisdom, but it certainly has been working in my favor lately, with significant increases in yields since I started buying in May, although that has turned around a bit lately.

I personally am buying in the ranges that offer decent yield premiums for extending maturity. I am not buying where the yield curve is flat or inverted. That's my personal preference, which does not mean it's right for anyone else.

Somewhat off topic, but I am buying box spreads as a substitute for nominal Treasuries, and getting decent yield premiums over Treasuries in doing so. Can't do that with a fund, just like you can't own CDs in a fund (I was big into CDs in recent years when I was getting 100 basis points or more above Treasury yields, but that has not been possible for the last couple of years).

Finally, I don't want to discuss individual bonds vs. funds much in this thread, as that's not what it's for. I am just stating this as a personal preference--not trying to moderate.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by evelynmanley »

Kevin M wrote: Tue Aug 02, 2022 3:56 pm
evelynmanley wrote: Tue Aug 02, 2022 3:06 pm Thank you again for your help, Kevin. Am I understanding correctly how to determine yield of VMFXX? At 1.92% interest rate today, do we annualize that to determine monthly amount? (Investment amount x 1.92%)/12?
What exactly is it that you want to know?

If you are wondering what the monthly income will be, we don't really know. The distribution yield may be higher or lower than the SEC 7-day yield, and it's the distribution yield that determines the income (actually vice versa).

Also, we expect that the VMFXX yield will continue to increase, at least to the effective federal funds rate, which is about 2.3%, so we probably will earn more than 1.9% over the next month.

EDIT: Most yields and returns are expressed as annualized numbers, which is what the 1.92% is, so the annualized yield is what we use to compare investments.

Kevin
Thank you, Kevin. Yes, I was confused about what the SEC 7-day yield means. I'm used to annualizing the Treasury yields but wasn't sure that's how we approach the VMFXX yield, too, if that makes sense.
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

Kevin M wrote: Tue Aug 02, 2022 4:18 pm Finally, I don't want to discuss individual bonds vs. funds much in this thread, as that's not what it's for. I am just stating this as a personal preference--not trying to moderate.
OK but just to (sort of) agree with you, our Treasury fund holdings are only about 5% of our total Treasury holdings. :)

Having a choice of which Treasury maturity to buy or sell during this time of widely fluctuating rates seems like a good idea. (But it sometimes gets to be a real PITA.)
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Re: Trading Treasuries (nominal and TIPS)

Post by Firefly80 »

Kevin M wrote: Tue Aug 02, 2022 4:18 pm
Firefly80 wrote: Tue Aug 02, 2022 4:02 pm Kevin,

Why do you personally prefer Individual Bonds to Funds?

Do you think it’s possible to get better returns buy purchasing at certain points along the Yield Curve compared to funds?
I still have significant money in bond funds, but lately have only been buying individual securities.

I don't know that I will get better returns, but am uncomfortable locking in relatively low yields for longer terms. I know this does not go along with the conventional wisdom, but it certainly has been working in my favor lately, with significant increases in yields since I started buying in May, although that has turned around a bit lately.

I personally am buying in the ranges that offer decent yield premiums for extending maturity. I am not buying where the yield curve is flat or inverted. That's my personal preference, which does not mean it's right for anyone else.

Somewhat off topic, but I am buying box spreads as a substitute for nominal Treasuries, and getting decent yield premiums over Treasuries in doing so. Can't do that with a fund, just like you can't own CDs in a fund (I was big into CDs in recent years when I was getting 100 basis points or more above Treasury yields, but that has not been possible for the last couple of years).

Finally, I don't want to discuss individual bonds vs. funds much in this thread, as that's not what it's for. I am just stating this as a personal preference--not trying to moderate.

Kevin
Thanks! It only makes sense to obtain meaningful additional yield when extending out in maturity. CD's have been slow to rise lately but I expect they will catch up at some point.
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Re: Trading Treasuries (nominal and TIPS)

Post by Doc »

Firefly80 wrote: Tue Aug 02, 2022 4:40 pm It only makes sense to obtain meaningful additional yield when extending out in maturity.
I agree with you Fifefly80

but

For those investors that want a liability matching portfolio, the long term inflation protection of TIPS might negate this idea.

(I myself am not one of those investors with a liability matching portfolio.)
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

Firefly80 wrote: Tue Aug 02, 2022 4:40 pmCD's have been slow to rise lately but I expect they will catch up at some point.
CD rates are slower to rise and slower to fall, as a result you can still get 3.55% on a 5 year brokered CD. That's significantly above the ~2.9% for a 5 year treasury.

Of course, some would say it's not worth going to 5 years, because there's 3.35% available on a 2 year CD. And then they might next say, it's not worth buying the 2 year CD over the 2 year Treasury, which is at about 3.1%. And then, they might next say that it's not worth buying the 2 year Treasury, because you can get just about the same yield at 12 months. :mrgreen:
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Re: Trading Treasuries (nominal and TIPS)

Post by BlueEars »

5 year TIPS went up nicely today to around 0.16%. I would like to buy at around 1.0% if that happens. On June 14th they actually got up briefly to 0.73%.

Here is a chart I made comparing 5 year Treasury real yields and TIPS. Of course, for nominal Treasuries the history is not know for 5 years.

Image
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Today I bought 10 of the 4/15/2023 TIPS at 100.84 (Fidelity only provides price to 2 decimal places in its download, which is what I use for my calculations), which is a real yield of -0.58%. Seasonality is significant: the seasonally adjusted (SA) yield is -1.31%. I also bought 10 each at Vanguard for a couple of family member's accounts at a slightly higher price (but by then price had increased to about the same level at Fidelity).

The large/small-qty yield spread was relatively large at about 4-5 basis points, but still not a big deal.

My last purchase of this issue was on 7/12/2022 (settlement) at 101.11, a yield of -0.83%, and a SA yield of -1.39%.

One thing that's interesting is that even though the real price was lower (and real yield was higher) for today's purchase (8/4 settlement), the total amount paid today was higher. Accrued interest was a bit higher, but the higher amount came mainly from the higher index ratio, which has increased by 0.84% between 7/12 and 8/4 settlement dates.

Total amount for the 7/12 settlement was 11,831.94, and for 8/4 settlement was 11,903.92.

Index ratios were 1.16848 and 1.17832 respectively.

Accrued interest was 17.56 and 22.33 respectively.

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Re: Trading Treasuries (nominal and TIPS)

Post by BlueEars »

Just looked at comparable quotes:

TIPS 4/15/23 -0.458%
Tbill 4/20/23 2.911%

So maybe the market is expecting something like 2.9 - (-0.5) = 3.4% inflation for this period of 8.5 months ? Or is this too simplistic an interpretation?
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

BlueEars wrote: Thu Aug 04, 2022 9:51 am Just looked at comparable quotes:

TIPS 4/15/23 -0.458%
Tbill 4/20/23 2.911%

So maybe the market is expecting something like 2.9 - (-0.5) = 3.4% inflation for this period of 8.5 months ? Or is this too simplistic an interpretation?
Well, the TIPS yield is increased due to lower liquidity and decreased due to the inflation "insurance", but that 3.4% (annualized) would be the non-seasonally adjusted break-even inflation rate and my guess would be that it is probably close to expected non-seasonally adjusted inflation. Note that is an annualized figure and would mean about 2.4% inflation for that period.

Also note that we already know the TIPS inflation index that will be applied through Sept. 1. The reference CPI is 296.311 for Sept. 1 and 292.68455 for today, Aug 4. And the reference CPI for April 15 will be determined based on the interpolated actual, non-seasonally adjusted, CPI for Jan. 15. So the unknown portion of inflation to be applied will be based what happens with non-seasonally adjusted inflation from July to Feb. I am too lazy to do it, but it could be determined exactly what the reported CPI for Jan. 15 would need to be to break-even and from that find the break-even inflation rate for Sept 1 to Jan. 15.
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Re: Trading Treasuries (nominal and TIPS)

Post by dbr »

BlueEars wrote: Thu Aug 04, 2022 9:51 am Just looked at comparable quotes:

TIPS 4/15/23 -0.458%
Tbill 4/20/23 2.911%

So maybe the market is expecting something like 2.9 - (-0.5) = 3.4% inflation for this period of 8.5 months ? Or is this too simplistic an interpretation?
It is basically a definition of "expected inflation." It might be simplistic to take that as a forecast of inflation. I have a hard time getting my head around what it means for a market to "expect" something. The idea that the number would be a point of current indifference between the two choices makes sense.
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Re: Trading Treasuries (nominal and TIPS)

Post by MisterMister »

Yes, for someone who has only recently begun trading TIPs (I am in that category), there can be some surprises if you chart out possible results.

The shortest term TIPs is the one maturing in January, with a coupon of .125%. I bought some of those in Mid-July at a price of 100.835, with a yield of -1.51417%. Today's price and yield numbers are 100.722 and -1.49414%. Note the chart below is only for these two recent purchase on the secondary market.

This bond matures less than six months out, and the resulting yield will be determined by the October and November CPI numbers (since those determine the January 15 2023 reference CPI).

For want of a better term I've titled this "October YOY inflation", though more precisely it is the YOY value for Jan 15,2023 reference CPI. For the return to be above zero, the YOY value needs to be 5.55% or above for the July purchase, and 6.33% or above for today's purchase (settling tomorrow). Note that, although today's quoted price is lower than July's, the adjusted purchase amount is actually higher due to the change in ref CPI since July 13.

Yield values were determined using Excel's XIRR function with the cash flows and associated dates. So they are effective annualized values. Here you can see that the 7/13 purchase has better final results even though the price quote was higher than the latter one. This is because the adjusted price paid for the latter purchase is more due to the increase in the reference CPI.

I should add that I am not a mathematician or financial analyst. There could be mistakes, even though I've been careful.

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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

BlueEars wrote: Thu Aug 04, 2022 9:51 am Just looked at comparable quotes:

TIPS 4/15/23 -0.458%
Tbill 4/20/23 2.911%
So maybe the market is expecting something like 2.9 - (-0.5) = 3.4% inflation for this period of 8.5 months ? Or is this too simplistic an interpretation?
Not quite. Those are annualized yields, so the conventional BEI calculation that you're doing gives an annualized BEI of 3.4%.

Using yields pulled today from Fidelity:

4/15/2023 TIPS ask yield = -0.42%, seasonally adjusted (SA) ask yield = -1.16%

4/15/2023 Treasury note yield = 3.00%.

Conventional BEI = 3.42%

SA conventional BEI = 4.16%

BEI factoring in known Sep 1 ref CPI = 1.88%.

SA BEI factoring in Sep 1 ref CPI = 2.81%.

I believe that the SA BEI of 2.8 percentage points is the most accurate.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by prettybogle »

Thanks to Kevin and this thread, we started buying treasury bills and also brokered cd's in our Vanguard brokerage account. We are confused how to review these positions- I mean we see them but we are having difficulty understanding data such as yield/interest rate. For example, we placed an order to buy 1 month treasury bill in auction. We received email today that this order is fullfilled and $100 face value bill was bought for $99.84. Then we had to do calculation to figure out effective interest rate we got. Is there a easier way of knowing this data without us doing calculations?
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

prettybogle wrote: Thu Aug 04, 2022 2:44 pm Thanks to Kevin and this thread, we started buying treasury bills and also brokered cd's in our Vanguard brokerage account. We are confused how to review these positions- I mean we see them but we are having difficulty understanding data such as yield/interest rate. For example, we placed an order to buy 1 month treasury bill in auction. We received email today that this order is fullfilled and $100 face value bill was bought for $99.84. Then we had to do calculation to figure out effective interest rate we got. Is there a easier way of knowing this data without us doing calculations?
Your order confirmation will show the yield, or maybe for bills the discount rate. The latter is what Treasury refers to as the "high rate".

You can look up the Treasury auction results to see the yield (investment rate). Select the term of interest (4-week), and drill down to find your auction, then open the Competitive PDF. The yield for your bill is 2.143%. The high rate is 2.110%, so if Vanguard shows that as discount rate on the order confirmation, you know your yield is a little higher than that.

You also can calculate yield with the YIELD function. I can go into this in more detail if you know how to use a spreadsheet.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

Kevin M wrote: Thu Aug 04, 2022 1:47 pm
BlueEars wrote: Thu Aug 04, 2022 9:51 am Just looked at comparable quotes:

TIPS 4/15/23 -0.458%
Tbill 4/20/23 2.911%
So maybe the market is expecting something like 2.9 - (-0.5) = 3.4% inflation for this period of 8.5 months ? Or is this too simplistic an interpretation?
Not quite. Those are annualized yields, so the conventional BEI calculation that you're doing gives an annualized BEI of 3.4%.

Using yields pulled today from Fidelity:

4/15/2023 TIPS ask yield = -0.42%, seasonally adjusted (SA) ask yield = -1.16%

4/15/2023 Treasury note yield = 3.00%.

Conventional BEI = 3.42%

SA conventional BEI = 4.16%

BEI factoring in known Sep 1 ref CPI = 1.88%.

SA BEI factoring in Sep 1 ref CPI = 2.81%.

I believe that the SA BEI of 2.8 percentage points is the most accurate.

Kevin
I think both SA and NSA BEI would be equally accurate, assuming your calculations are equally accurate, of course :wink: . As I see it each is just telling us something different.

The SA figure would be the one that gives a better feel for how significant inflation would need to be, since we think of inflation being equally likely in one month vs. another and it's mostly reported as a seasonally adjusted figure. So 2.81% inflation from Sept. 1 reference to April 15 reference CPI is 7.5 months and that would be about a 4.5% annualized rate, so about double the Fed's target rate, pretty high but much lower than it's been recently.

The NSA figure would tell us exactly what the NSA CPI would need to reach, since that is what is used to set the value of the TIPS. So if that break even figure is 1.88% above what it is for Sept. 1 (296.311), that should mean that if it is 301.881647 for April 15 the return of the nominal and TIPS will be equal. That April 15 reference CPI figure would, of course, actually be based on averaging the reported CPI for Jan and Feb.
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Re: Trading Treasuries (nominal and TIPS)

Post by prettybogle »

Kevin M wrote: Thu Aug 04, 2022 3:06 pm
prettybogle wrote: Thu Aug 04, 2022 2:44 pm Thanks to Kevin and this thread, we started buying treasury bills and also brokered cd's in our Vanguard brokerage account. We are confused how to review these positions- I mean we see them but we are having difficulty understanding data such as yield/interest rate. For example, we placed an order to buy 1 month treasury bill in auction. We received email today that this order is fullfilled and $100 face value bill was bought for $99.84. Then we had to do calculation to figure out effective interest rate we got. Is there a easier way of knowing this data without us doing calculations?
Your order confirmation will show the yield, or maybe for bills the discount rate. The latter is what Treasury refers to as the "high rate".

You can look up the Treasury auction results to see the yield (investment rate). Select the term of interest (4-week), and drill down to find your auction, then open the Competitive PDF. The yield for your bill is 2.143%. The high rate is 2.110%, so if Vanguard shows that as discount rate on the order confirmation, you know your yield is a little higher than that.

You also can calculate yield with the YIELD function. I can go into this in more detail if you know how to use a spreadsheet.

Kevin
Thanks Kevin. Very helpful information. I bought some treasuries in secondary market- this looks more easier to understand as the rate is published right away and shows how much I am paying.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

prettybogle wrote: Thu Aug 04, 2022 3:41 pm [quote="Kevin M" post_id=6808326 time=165
Thanks Kevin. Very helpful information. I bought some treasuries in secondary market- this looks more easier to understand as the rate is published right away and shows how much I am paying.
Plus, you don't have to wait so long for settlement. The bill you bought today is issued (settles) next Tuesday. If you bought today in secondary market, it settles tomorrow. And of course you don't have to wait for an auction to buy--you can buy any day the market is open.

Finally, you have access to many more maturities on the secondary market. For TIPS, you can't buy less than 5-year (or 4-year 10-month) maturity at auction, but I've been buying anywhere from six month to five year maturities.

I buy almost all my Treasuries on the secondary market for the above reasons.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by squirrel1963 »

Kevin M wrote: Thu Aug 04, 2022 4:22 pm
prettybogle wrote: Thu Aug 04, 2022 3:41 pm [quote="Kevin M" post_id=6808326 time=165
Thanks Kevin. Very helpful information. I bought some treasuries in secondary market- this looks more easier to understand as the rate is published right away and shows how much I am paying.
Plus, you don't have to wait so long for settlement. The bill you bought today is issued (settles) next Tuesday. If you bought today in secondary market, it settles tomorrow. And of course you don't have to wait for an auction to buy--you can buy any day the market is open.

Finally, you have access to many more maturities on the secondary market. For TIPS, you can't buy less than 5-year (or 4-year 10-month) maturity at auction, but I've been buying anywhere from six month to five year maturities.

I buy almost all my Treasuries on the secondary market for the above reasons.

Kevin
I think another reason to buy on the secondary market is that you know exactly how much it will cost you, and that can be important.
For instance in my case next year I'll replace the portion of 2032 TIPS earmarked for 2033 with the new 10 year issue, but I'll almost sure do a large chunk (if not all) of the purchase after the auction because I won't able to know exactly how many bonds I can get otherwise. Also waiting after auction will allow me to decide whether the real yield of the new issue is actually worth doing this swap.
LMP | Liability Matching Portfolio | safe portfolio: TIPS ladder + I-bonds + Treasuries | risky portfolio: US stocks / US REIT / International stocks
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

jeffyscott wrote: Thu Aug 04, 2022 3:14 pm I think both SA and NSA BEI would be equally accurate, assuming your calculations are equally accurate, of course :wink: . As I see it each is just telling us something different.
Right, accurate was not the best word. Here is an extract from the Paul Canty paper from which I learned the simpler way to calculate the seasonal adjustments:
Many economists and market commentators exhibit a lack of
clarity when talking about real yield and breakeven inflation
levels of ILBs. It is not really meaningful to talk about the level
of BEI or changes to that level without also quantifying the
effects of seasonality
and carry (the difference between the forward
rate and the spot rate).
Underline mine.

Reading a bit further in that paper, I think I may have been doing the BEI calculations using the latest known ref CPI wrong.
Recall the timeline in figure 2. In the period between tSettle-lag
and tSettle (a period usually of three months) there will be one or
two CPI releases. So we know for certain some information about
inflation in the period of indexation of the bond. But we are interested in the market’s expectation of future inflation, so we need to
exclude the known inflation in the period between tSettle-lag and
the latest known CPI release date. To do this, we calculate the
forward price up to the furthest known settlement date given the
latest CPI release
.

For example, when the French CPI index for April 2007 was
published on May 15, 2007, the furthest forward date in the
future where we could calculate the clean price with certainty
(assuming a given repo rate) was July 1, 2007. On this date, the
three-month lag would refer to the April index value; on any later
date, we would need to interpolate between the April and May
values, and so would require knowledge of the May print. Figure
6 illustrates this point.

The application of the seasonal adjustment then follows in
exactly the same way as earlier except that, in the case of the
breakeven inflation rate, the forward nominal yield to the same
settlement date should be used.
According to the underlined part, for a BEI calculated today for the 4/15/2023 TIPS should not use 8/5/2022 as the settlement date for the nominal yield calculation, but 9/1/2022, since that's the date of the latest know ref CPI. I'm a bit fuzzy on how to calculate what Canty refers to as the "forward nominal yield"; is it just the standard forward rate calculated from the "spot rate" and the yield curve?

Maybe #Cruncher could step in and help us with this.

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

^Might the foreward nominal rate just mean using whatever it is for a nominal bond? So you would look at what a nominal bond maturing on Sept 1 yields and use that to determine what the expected price of the TIPS would be on that date?

Perhaps that means the same thing as "the standard forward rate calculated from the "spot rate" and the yield curve", though?
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

^I think the standard way to calculate forward rate would be to use the YTM for settlement (8/5/2022 in my example) to latest ref CPI date (9/1/2022) and YTM for settlement to maturity (8/5/2022 to 4/15/2023) to calculate YTM from latest ref CPI date to maturity (9/1/2022 to 4/15/2023). Here's the formula for annual compounding:

Image
Source: Forward rate - Wikipedia

In our case t1 = 8/5/2022 and t2 = 4/15/2023. This equation is for zero-coupon bonds, but maybe good enough

I can see doing this manually, but it's obviously a more complicated than what I'm now doing in my spreadsheet, which is simply to use VLOOKUP to find the yield for a nominal maturing on the same date (or the closest maturity date before that). I'll play around with this and see what I can come up with.

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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

^It actually wasn't that hard to calculate the nominal forward yield to last ref CPI date. Here are the BEIs using this approach compared to what I calculated using the current YTM:

BEI factoring in known Sep 1 ref CPI = 1.88%, 1.97% <- using forward yield

SA BEI factoring in Sep 1 ref CPI = 2.81%, 2.89% <- using forward yield

The BEI using the forward yield is slightly higher, because the forward yield is higher than the current YTM; e.g., for the 4/15/2023 nominal, yield is 2.96% and the forward yield on 9/1/2022 is 3.08%.

The forward yield on 9/1/2022 is the yield that you must receive to roll a Treasury maturing on 9/1/2022 to one maturing on 4/15/2023 to earn the current YTM for the 4/15/2023 nominal (from 8/5/2022 settlement).

Kevin
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Re: Trading Treasuries (nominal and TIPS)

Post by prettybogle »

Kevin M wrote: Thu Aug 04, 2022 4:22 pm
prettybogle wrote: Thu Aug 04, 2022 3:41 pm [quote="Kevin M" post_id=6808326 time=165
Thanks Kevin. Very helpful information. I bought some treasuries in secondary market- this looks more easier to understand as the rate is published right away and shows how much I am paying.
Plus, you don't have to wait so long for settlement. The bill you bought today is issued (settles) next Tuesday. If you bought today in secondary market, it settles tomorrow. And of course you don't have to wait for an auction to buy--you can buy any day the market is open.

Finally, you have access to many more maturities on the secondary market. For TIPS, you can't buy less than 5-year (or 4-year 10-month) maturity at auction, but I've been buying anywhere from six month to five year maturities.

I buy almost all my Treasuries on the secondary market for the above reasons.

Kevin
Thanks Kevin 👍
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

Kevin M wrote: Thu Aug 04, 2022 6:54 pm ^It actually wasn't that hard to calculate the nominal forward yield to last ref CPI date. Here are the BEIs using this approach compared to what I calculated using the current YTM:

BEI factoring in known Sep 1 ref CPI = 1.88%, 1.97% <- using forward yield

SA BEI factoring in Sep 1 ref CPI = 2.81%, 2.89% <- using forward yield

The BEI using the forward yield is slightly higher, because the forward yield is higher than the current YTM; e.g., for the 4/15/2023 nominal, yield is 2.96% and the forward yield on 9/1/2022 is 3.08%.

The forward yield on 9/1/2022 is the yield that you must receive to roll a Treasury maturing on 9/1/2022 to one maturing on 4/15/2023 to earn the current YTM for the 4/15/2023 nominal (from 8/5/2022 settlement).

Kevin
So I guess the idea that in this way, you are looking at only the period where the inflation factor is not known, in this case from 9/1/22 to 4/15/22, for both the nominal and the TIPS?
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Re: Trading Treasuries (nominal and TIPS)

Post by billyt »

Anyone buying today?
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Re: Trading Treasuries (nominal and TIPS)

Post by jeffyscott »

billyt wrote: Fri Aug 05, 2022 10:57 am Anyone buying today?
I've got nothing to buy with, but just began the process of paying a 3 month interest penalty to cash in a couple CDs with about a year left on each at 1.9 and 2%, so hopefully the higher interest rates persist for at least a couple weeks.
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Help with trading Treasuries and a few CDs

Post by nonnie »

Newbie question here. I purchased by first Treasuries and a few CDs yesterday; three separate ladders. I figured out the amounts in each account, the number of ladders, etc. Then I called the Fidelity bond specialist I'd spoken to several weeks ago who said he'd help me with the process. We discussed my plan, tweaked the maturities a bit and then we looked at the offerings together and I did the purchases. In one case, I just couldn't get the purchase to go through so he did it for me, waived the fee.

It went fairly quickly, we started out figuring out whether a Treasury or CD was better, Treasuries almost always were. Then we would pick the highest YTM and then go to the offering that had a low enough minimum (remember, I'd never done this before, and my head was spinning a bit). He would tell me when the order was filled (have to figure that out), a couple times they didn't fill so we picked another.

Question is about-- I was buying 2-18 month and 1-24 month and CD rates were higher. I remember the admonishment that Treasuries are more liquid if one has to sell in an emergency but he said that wasn't a concern.

I ended up with--$100K and $47K of BEAL
BEAL BANK USA 3.050 SEMIANNUAL 02/14/2024 100.000 3.050 Yes 08/17/2022 3,749 SKY 18 MO and (this looks wonky this AM, it looked like it had a negative YTM but I looked quickly)

and $100K of Barclays
BARCLAYS BANK 3.300 SEMIANNUAL 08/12/2024 100.000 3.300 Yes 08/10/2022 11 FDIC SO 2 YR

My questions--the CDs have settlement dates of 8/10/22 and 8/17/22. In the meantime my funds are sitting in FDZXX earning around 2%. What if I had bought Treasuries with slightly lower yields yesterday with slightly lower YTM. How could I figure the difference between a slightly lower Treasury yield that started earning yesterday instead of waiting 5-12 days to purchase the CDs. Does that make sense? (my bond specialist doesn't work on Fridays and wasn't available yesterday after our purchase to discuss this further)

I note with a quick look today there are 18 month and 24 month Treasuries paying a higher YTM than 3.05 and 3.3 respectively. Should I cancel my CD order and buy the Treasuries? Specific issue suggestions?
Thanks for any help, I would really appreciate it.

Diane

Nonnie
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Re: Trading Treasuries (nominal and TIPS)

Post by hoops777 »

I bought a 1 year 60,000 treasury on the secondary less than 4 weeks ago and received an interest payment of $880 early this week. Is that normal?
K.I.S.S........so easy to say so difficult to do.
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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

Took a quick look at bond ETFs, and saw that short-term TIP fund prices were down more than usual lately (meaning yields up). Sure enough, TIPS yields are up nicely today. I bought 10 more each of the 1/15/2023 and the 4/15/2023 in my IRA, and bought 100 of the 1/15/2023 for one of my adult children in her taxable account.

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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

hoops777 wrote: Fri Aug 05, 2022 12:51 pm I bought a 1 year 60,000 treasury on the secondary less than 4 weeks ago and received an interest payment of $880 early this week. Is that normal?
Sure. When you bought it you paid for the accrued interest since last interest payment, and now you've received that back along with any additional interest earned since purchase. What is the maturity date? It should either be in August or February, since those would be the two interest payment months if you received interest in August.

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Re: Trading Treasuries (nominal and TIPS)

Post by Kevin M »

jeffyscott wrote: Thu Aug 04, 2022 9:18 pm
Kevin M wrote: Thu Aug 04, 2022 6:54 pm ^It actually wasn't that hard to calculate the nominal forward yield to last ref CPI date. Here are the BEIs using this approach compared to what I calculated using the current YTM:

BEI factoring in known Sep 1 ref CPI = 1.88%, 1.97% <- using forward yield

SA BEI factoring in Sep 1 ref CPI = 2.81%, 2.89% <- using forward yield

The BEI using the forward yield is slightly higher, because the forward yield is higher than the current YTM; e.g., for the 4/15/2023 nominal, yield is 2.96% and the forward yield on 9/1/2022 is 3.08%.

The forward yield on 9/1/2022 is the yield that you must receive to roll a Treasury maturing on 9/1/2022 to one maturing on 4/15/2023 to earn the current YTM for the 4/15/2023 nominal (from 8/5/2022 settlement).

Kevin
So I guess the idea that in this way, you are looking at only the period where the inflation factor is not known, in this case from 9/1/22 to 4/15/22, for both the nominal and the TIPS?
Yes, I think that's the idea.
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Re: Help with trading Treasuries and a few CDs

Post by Kevin M »

nonnie wrote: Fri Aug 05, 2022 12:40 pm I note with a quick look today there are 18 month and 24 month Treasuries paying a higher YTM than 3.05 and 3.3 respectively. Should I cancel my CD order and buy the Treasuries? Specific issue suggestions?
Thanks for any help, I would really appreciate it.
If you can cancel the CD orders, I would, and then buy Treasuries with higher yields instead.

There are four Treasuries maturing 2/15/2024 (about 18 months) with yields from 3.112% to 3.321%. I would buy the one with the highest yield.

There are four maturing 8/15/2024, with yields from 3.094% to 3.206%, so not higher than 3.3%, but if you want to do it, I would go for the highest yield, as usual.

Liquidity is not a concern if you are 100% sure you will not sell before maturity. Otherwise, I'd give up a few basis points for the extra liquidity of Treasuries.

Kevin
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